CLA-2 R:C:S 559137 DEC
Mr. Jonathon M. Fee
Grunfeld, Desiderio, Lebowitz & Silverman
1201 West Peachtree Street, N.E.
Suite 4860
Atlanta, Georgia 30309
RE: General Note 3(a)(iv), HTSUS; T.D. 88-17; 19 CFR 12.130; HRL 731028;
HRL 732485; HRL 731036; Texas Instruments, Inc. v. United States,
681 F.2d 778 (Fed. Cir. 1982); C.S.D. 85-25; Double Substantial
Transformation; HRL 556214; HRL 556781; HRL 067823; HRL 071620
Dear Mr. Fee:
This is in reference to your letter of April 3, 1995, on behalf of Advance Textile Glove Corporation (Advance), concerning the eligibility of certain knit fabric used in the production of T-shirts in the Commonwealth of the Northern Mariana Islands (CNMI) as part of the value of materials produced in the CNMI for purposes of the foreign value limitation under General Note 3(a)(iv), Harmonized Tariff Schedule of the United States (HTSUS).
FACTS:
Advance manufactures T-shirts in the CNMI. Fabric for all parts of the T-shirt except for the neck band is a circular knit cotton jersey fabric imported into the CNMI from a foreign country in uncut, unmarked rolls. Fabric for the neck band is a circular rib knit cotton fabric also imported into the CNMI in uncut, unmarked rolls. For purposes of this ruling request, thread, labels, and packaging are assumed to be of foreign origin and will not be considered as part of the value of the materials produced in the CNMI.
After inspecting and testing the imported fabric, Advance cuts the knit and ribbed fabric to shape using a paper marker for use in the production of the T-shirt. After cutting, the various cut pieces are gathered in bundles each of which contains all of the pieces necessary for the construction of specific quantity of T-shirts. These bundles are taken to the sewing room in Advance's factory for assembly.
To assemble the T-shirts, Advance employees remove the sleeve parts from the bundles, fold them, and machine-stitch a hem on the bottom of each sleeve part. Next, the sleeve part is closed using an overlock stitch machine to form a cylindrically shaped sleeve. The T-shirt bodies are turned inside out and the shoulder seam on either side of the neck is closed using a overlock stitch machine. The ends of the neck band are then sewn together on the same machine. The neck band is positioned on a cylinder bed attachment machine to an overlock stitch machine which is used to attach the body to the neck band. During this process, a label is stitched into the back of the neck opening. A "tape" of jersey fabric is formed and run through a sticking machine. This "tape" is then sewn across one shoulder seam, the back neck seam, and then the other shoulder seam to cover the seam and give the garment greater stability. Finally, the sleeves and armhole edges are sewn together and the fabric at the bottom of the shirt is folded over and chainstitched to form a hem.
ISSUE:
Whether the knit fabric described above is eligible to be included as part of the value of materials produced in the CNMI for purposes of the foreign value limitation under General Note 3(a)(iv), HTSUS.
LAW AND ANALYSIS:
General Note 3(a), HTSUS, permits products of the insular possessions (which includes the CNMI (see, Presidential Proclamation 5564 of November 3, 1986 and E.O. 1272 of November 3, 1986)) of the United States to be imported into the United States free of duty if certain qualifications are met. The purpose of General Note 3(a) is to promote the economic development of the insular possessions. Duty-free entry is provided for products of the insular possessions if the products do not exceed a specified foreign value limitation. The products must not contain foreign material equal in value to more than 70 percent of their total value or more than 50 percent of their total value if the articles are ineligible for duty-free entry under the Caribbean Basin Economic Recovery Act (CBERA) and the goods must come directly to the customs territory of the United States from the possession. All products of the insular possessions are eligible for duty-free treatment under General Note 3(a) if they qualify.
T.D. 88-17 extends the concept of double substantial transformation to products of the insular possessions. Accordingly, foreign material that does not originate in an insular possession may be considered as the value of material produced in the insular possession for purposes of the value-added criterion, provided the foreign material is substantially transformed in the insular possession and this different product is then transformed into yet another new and different product which is exported to the United States.
Because the T-shirts in question are textile products that are not permitted to be entered duty-free pursuant to 19 U.S.C. 2703(b)(1), no more than 50 percent of the T-shirts total value may be foreign materials to qualify for duty-free entry under General Note 3. Section 12.130, Customs Regulations (19 CFR 12.130) is applicable in determining whether the rolls of imported, unmarked cotton fabrics are substantially transformed. 19 CFR 12.130 provides that the country of origin of a textile product is that foreign territory, country or insular possession where the article last underwent a substantial transformation. Section 12.130(e)(iv), Customs Regulations (19 CFR 12.130(e)(iv)), states that the cutting of fabric into parts and the assembly of those parts into the completed article will usually result in the processing country being the country of origin. Furthermore, we have held that the cutting of fabric (which contains no indication where that fabric is to be cut) into garment parts, constitutes a substantial transformation of the fabric and the parts become a product of the country where the fabric is cut. See, Headquarters Ruling Letter (HRL) 731028, dated July 18, 1988; HRL 732485, dated January 18, 1990; and HRL 731036, dated July 18, 1991. In this case, the foreign circular knit cotton jersey fabric and the circular rib knit cotton fabric imported in bolts that is marked for cutting into pattern pieces and then cut into the pattern pieces in the CNMI are substantially transformed into a "product of" the CNMI.
In order to determine whether the cost or value of the foreign fabric should be considered part of the cost of "foreign materials" or the cost of materials produced in the CNMI for purposes of the 50% foreign value limitation under General Note 3(a)(iv), we must consider whether such fabric undergoes a "double substantial transformation" in the insular possession. We have held that, for purposes of the Generalized System of Preferences (GSP), an assembly process will not work a substantial transformation unless the operation is "complex and meaningful." See C.S.D. 85-25, 19 Cust. Bull. 544 (1985). Whether an operation is complex and meaningful depends on the nature of the operation. It is necessary to consider the time, cost, and skill involved, the number of components assembled, the number of different operations, attention to detail and quality control, as well as the benefit accruing to the beneficiary developing country (BDC) as a result of the employment opportunities generated by the manufacturing process.
In Texas Instruments, Inc. v. United States, 681 F.2d 778 (Fed. Cir. 1982), the court implicitly found that assembly of 3 integrated circuits, photodiodes, one capacitor, one resistor, and a jumper wire onto a flexible circuit board (PCBA) constituted a second substantial transformation. It would appear that this assembly procedure does not achieve the level of complexity contemplated by C.S.D. 85-25. However, as the court pointed out in Texas Instruments, in situations where all the processing is accomplished in one GSP beneficiary country, the likelihood that the processing constitutes little more than a pass-through operation is greatly diminished. Consequently, if the entire processing operation performed in the single BDC is significant, and the intermediate and final articles are distinct articles of commerce, then the double substantial transformation requirement will be satisfied. Such is the case even though the processing required to convert the intermediate article into the final article is relatively simple and, standing alone, probably would not be considered a substantial transformation. See HRL 071620 dated December 24, 1984 (in view of the overall processing in the BDC, materials were determined to have undergone a double substantial transformation, although the second transformation was a relatively simple assembly process which, if considered alone, would not have conferred origin). We believe that the rationale stated above, which was adopted for GSP purposes, is equally applicable to products being imported from insular possessions. See T.D. 88-17 (General Note 3(a)(iv)(C) provides that articles imported from insular possessions under General Note 3(a)(iv) shall receive duty treatment "no less favorable" than that afforded under the GSP and Caribbean Basin Initiative programs).
Applying these principles to the processing of the foreign fabric in the CNMI, we believe that the double substantial transformation requirement is satisfied. First, the cutting in the CNMI of the imported bolts of knit fabric into panels and other pieces of defined shapes and sizes will transform the foreign fabric into new and different articles of commerce. We believe that these panels and other pieces of fabric are considered to be intermediate articles of commerce which are ready to be put into the stream of commerce where they can be bought and sold. We must next determine whether a second substantial transformation occurs in the CNMI.
The assembly of the T-shirt involves seven distinct steps detailed in your submission. You contend that while the sewing operations may not be considered to be complex or substantial enough to constitute a substantial transformation for purposes of country of origin purposes, the assembly operations are a sufficient processing for purposes of qualifying under the double substantial transformation concept.
We agree with your assessment. We believe that the assembly operation of sewing the panels and other pieces into a finished T-shirt may not be complex enough to constitute a substantial transformation by itself. Nevertheless, we are of the opinion that the overall processing operations (i.e., marking, cutting, sewing, hemming, trimming, and packaging) performed in the single insular possession are substantial. For this reason, and in view of the production in the CNMI of distinct articles of commerce in the form of a T-shirt, we find that the double substantial transformation requirement is satisfied. Further, we do not believe that this is the type of minimal, "pass-through" operation that should be disqualified from receiving duty-free treatment under General Note 3(a)(iv). See C.S.D. 85-25; HRL 556104, dated September 10, 1991 (foreign fabric imported into the CNMI to be marked, cut, assembled by various sewing operations, ironed, and packed, undergoes a double substantial transformation when manufactured into men's cotton trousers); HRL 556214, dated March 20, 1992 (foreign fabric imported into the CNMI where it was cut to pattern and sewn together (hemming, top stitching and cover stitching), embroidered, and pigment washed to produce a men's golf shirt and sport pullover underwent a double substantial transformation); and HRL 556781, dated February 3, 1993 (Chinese-origin fabric imported into the CNMI, cut into seven panels of a shirt which were sent back to China for printing of a crest and brand name, and then returned to the CNMI for various sewing operations to create finished golf shirts underwent a double substantial transformation in the CNMI for purposes of the foreign value limitation requirement of General Note 3(a)(iv), HTSUS).
HOLDING:
Based on the samples and information provided, we find that the foreign fabric imported into the CNMI will undergo the requisite double substantial transformation when manufactured into the T-shirts described above. Therefore, pursuant to T.D. 88-17, the fabric imported into the CNMI is not considered "foreign material" but, instead, is regarded as material produced in the insular possession for purposes of calculating the 50% foreign value limitation under General Note 3(a)(iv), HTSUS. Provided the cost of the remaining foreign accessory items incorporated in the garments represents less than 50% of each garment's total value, the imported t-shirts will satisfy the 50% foreign value limitation under General Note 3(a)(iv), HTSUS, and, therefore, will be entitled to duty-free treatment, assuming they are imported directly into the United States.
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the Customs officer handling the transaction
Sincerely,
John Durant, Director
Commercial Rulings Division